Before we talk about Real estate regulation Act 2016, we must first talk about what we mean by the term REAL ESTATE.
Meaning of Real Estate
Real Estate includes - Land and anything fixed, immovable, or permanently attached to it such as appurtenances, buildings, fences, fixtures, improvements, roads, shrubs and trees (but not growing crops), sewers, structures, utility systems, and walls. Title to real estate normally includes title to air rights, mineral rights, and surface rights which can be bought, leased, sold, or transferred together or separately. It is also called real property or realty.
Introduction of the Act
The Real Estate (Regulation and Development) Act, 2016 is an Act of the Parliament of India which seeks to protect home-buyers as well as help boost investments in the real estate industry. The Act establishes Real Estate Regulatory Authority (RERA) in each state for regulation of the real estate sector and also acts as an adjudicating body for speedy dispute redressal. The bill was passed by the Rajya Sabha on 10 March 2016 and by the Lok Sabha on 15 March 2016. The Act came into force on 1 May 2016 with 59 of 92 sections notified. Remaining provisions came into force on 1 May 2017.
Why was this act Necessary?
We needed RERA in order to revive confidence in our country’s real estate sector. It is one of the leading revenue generators in our country and it needed some regulatory authority or some transparent government authority to keep a check on developers. RERA provides a common ground for both buyers and developers and reduces the risks which were faced by the people before.
For long, home buyers have complained that real estate transactions were lopsided and heavily in favour of the developers. RERA and the government’s model code, aim to create a more equitable and fair transaction between the seller and the buyer of properties, especially in the primary market. RERA, it is hoped, will make real estate purchase simpler, by bringing in better accountability and transparency, provided that states do not dilute the provisions and the spirit of the central act.
The RERA gives the Indian real estate industry its first regulator. The Real Estate Act makes it mandatory for each state and union territory, to form its own regulator and frame the rules that will govern the functioning of the regulator.
RERA is of extreme importance as it will be applicable to more than 76,000 companies across the country. A buyer will have all the rights to know every detail about a real estate project and will also have the right to get all the documents related to the project. RERA will ensure timely delivery of the project and it is a big relief to homebuyers. It will ensure more clarity between the developers and buyers thereby ensuring transparency.
How will RERA impact home buyers?
Some of the important compliances are:
- Informing allottees about any minor addition or alteration.
- Consent of 2/3rd allottees about any other addition or alteration.
- No launch or advertisement before registration with RERA
- Consent of 2/3rd allottees for transferring majority rights to 3rd party.
- Sharing information project plan, layout, government approvals, land title status, sub-contractors.
- Increased assertion on the timely completion of projects and delivery to the consumer.
- An increase in the quality of construction due to a defect liability period of five years.
- Formation of Resident Welfare Association (RWA) within specified time or 3 months after majority of the units havebeen sold.
The most positive aspect of this Act is that it provides a unified legal regime for the purchase of flats; apartments, etc., and seeks to standardize the practice across the country.
Key Highlights of the Act
- Establishment of Regulatory Authority: The absence of a proper regulator (like the Securities Exchange Board of India for the capital markets) in the real estate sectorwas long felt. The Act establishes Real Estate Regulatory Authority in each state and union territory. Its functions include protection of the interests of the stakeholders, accumulating data at a designated repository and creating a robust grievance redressal system.
- Compulsory registration: According to the central act, every real estate project (where the total area to be developed exceeds 500 sq mtrs or more than 8 apartments is proposed to be developed in any phase), must be registered with its respective state’s RERA. Existing projects where the completion certificate (CC) or occupancy certificate (OC) has not been issued, are also required to comply with the registration requirements under the Act.
- Reserve account: One of the primary reasons for delay of projects was that funds collected from one project, would invariably be diverted to fund new, different projects. To prevent such a diversion, promoters are now required to park 70% of all project receivables into a separate reserve account. The proceeds of such account can only be used towards land and construction expenses and will be required to be certified by a professional.
- Continual disclosures by promoters: After the implementation of the Act, home buyers will be able to monitor the progress of the project on the RERA website since promoters will be required to make periodic submissions to the regulator regarding the progress of the project.
- Title representation: Promoters are now required to make a positive warranty on his right title and interest on the land, which can be used later against him by the home buyer, should any title defect be discovered. Additionally, they are required to obtain insurance against the title and construction of the projects, proceeds of which shall go to the allottee upon execution of the agreement of sale.
- Penalty: To ensure that violation of the Act is not taken lightly, stiff monetary penalty (up to 10% of the project cost) and imprisonment has been prescribed against violators.
- Carpet Area:The area of a property is often calculated in three different ways – carpet area, built-up area and super built-up area. But as per RERA , it is now mandatory for the developers of all ongoing projects, to disclose the size of their apartments, on the basis on carpet area. According to the RERA, carpet area is defined as ‘the net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partitionwalls of the apartment’.
How will RERA impact Real Estate industry?
- Initial backlog.
- Increased project cost.
- Tight liquidity.
- Rise in cost of capital.
- Increase in project launch time.
Initially, a lot of work is to be done to get the existing and new project registered. Details such as status of each project executed in last 5 years, promoter details, detailed execution plans, etc., needs to be prepared.
With the advent of RERA, specialized forums such as the State Real Estate Regulatory Authority and the Real Estate Appellate Tribunal, will be established for the resolution of disputes pertaining to home buying and the aggrieved party will have no recourse to other consumer forums and civil courts, on such matters. While the RERA sets the groundwork for fast-tracking dispute resolution, the litmus test for its success, will depend on the timely setting up of these new dispute resolution bodies and how these disputes are resolved expeditiously with a degree of finality.
How can a builder be RERA compliant?
- Project registration.
- Withdrawal – POC method.
- Website updation/ Disclosures.
- Carpet area.
- Alteration in project – approval of 2/3 allottees.
- Project accounts – Audit.
- 70% of the funds collected from allottees needs to be deposited in the project account. Withdrawals to cover construction and land cost.
- Withdrawals to be in proportion to the percentage completion method.
- Withdrawal to be certified by an engineer, architect, and CA.
- Provision for RERA to freeze project bank accounts upon non-compliance.
- Interest on delay will be same for customer and promoter.
What information does a builder need to provide under RERA?
- Number, type and carpet area of apartments.
- Consent from affected allottees for any major addition or alteration.
- Quarterly updating of RERA website with details such as unsold inventory and pending approvals.
- Project completion time frame.
- No false statements or commitments in advertisement.
- No arbitrary cancellation of units by promoter.
How to register projects under RERA?
- Authenticated copy of all approvals, commencement certificate, sanctioned plan, layout plan, specification, plan of development work, proposed facilities, Performa allotment letter, agreement for sale and conveyance deed to be given when
- Applying for project registration with RERA.
- Mandatory registration of new and existing projects with RERA before launch.
- Registration of agents/brokers with RERA.
- Dispute resolution within 6 months at RERA and RERA appellate tribunals.
- Separate registration of different phases of a single project.
- Developers to share details of projects launched in last 5 years with status and reason for delay with RERA.
- Timely updating of RERA website.
- Maximum 1 year extension in case of delay due to no fault of developer.
- Annual audit of project accounts by a CA.
- Conveyance deed for common area in favour of RWA.
- Construction and land title insurance.
- Project completion time period.
How can brokers become RERA compliant?
1. Section 3: Promoter cannot advertise, book, sell or offer for sale, without registration with RERA.
2. Section 9:
- No agent can sell any project without obtaining RERA registration.
- Agents’ RERA number needs to be documented in every sale facilitated by him.
- Registration needs to be renewed.
- Registration can be revoked or blocked if any breach is made to conditions of registration for a specified time.
3. Section 10:
- No agent can sell a project not registered.
- Maintain books and records.
- Not be involved in unfair trade practices.
- Make an incorrect statement – oral, written, visual.
- Represent that services are of a particular standard.
- Represent that the promoter or himself has approval or affiliation which such promoter or himself does not have.
- Permit publication of advertisement in the newspaper or otherwise of services not intended to be offered.
- Agent needs to facilitate possession of all documents to the allottee at the time of booking.
How will RERA impact real estate agents?
Under the Real Estate (Regulation and Development) Act (RERA), real estate agents will need to register themselves, to be able to facilitate a transaction. The broker segment in India, is estimated to be a USD 4 billion industry, with an estimated 5,00,000 to 9,00,000 brokers. However, it has traditionally been unorganised and unregulated.
With RERA in force, brokers cannot promise any amenities or services that are not mentioned in the documents. Moreover, they will have to provide all information and documents to the home buyers, at the time of booking. Consequently, RERA is likely to filter out the inexperienced, unprofessional, fly-by-night operators, as brokers not following the guidelines will face hefty penalty or jail or both.
Applicable penalties under RERA
Section 9 (7)
Revocation of Agent Registration Number
Penalty of INR 10,000/-day during which the default continues extending up to 5% of cost of unit sold
Penalty up to 5% of cost of unit sold
Imprisonment for up to 1 year or with fine extend up to 10% of cost of unit sold
Market situation after one year of RERA
- There have been fewer project launches and the focus has been on execution.
- Developers have tried to adhere to compliances, to avoid litigation.
- Relaxed delivery timelines for existing projects has granted developers an escape window.
- The market is yet to witness any landmark judgment that could set a precedent.
RERA- A game changer
All these technical concepts and provisions are an indicator that with RERA in force the realty industry transcends from a de-facto system to an organized and regulated environment. In this process, it has revived the buyer sentiment which is evident in the strong latent demand in the last two quarters. Currently, it’s looking very promising and we are hoping that it will lead to strategic relations and communications between developers and home buyers, thereby boosting the demand for homes across the country.
If 2017 was a year of uncertainty with RERA and GST coming into force, coming years are believed to be the beginning of better times for real estate business. There will be an usher in a plethora of opportunities, rewriting the script of Indian Real Estate Landscape.